Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 9, Problem 2AP
To determine
To show: That the rise in interest rate is less in permanent supply shock than in temporary shock.
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2. Consider the IS-LM model derived in class. Suppose the economy of Economica is initially
at the general equilibrium. This year, Economica's economy is hit by a negative oil price
shock, i.e., oil prices in Economica increase dramatically.
a. Explain and show graphically how an oil price shock affects the labor, goods, or the asset
market
b. Explain and show graphically how an oil price shock affects the short-run equilibrium in
the IS-LM model
c. Explain and show graphically how an oil price shock affects the general (long-run)
equilibrium in the IS-LM model
Use the AS-AD model to analyze the impact
on the U.S. economy as a result of each of the
listed events. Mention if AD and/or AS shift
and in which direction. Also explain what the
country will experience with respect to
increase or decrease in short-run equilibrium
real GDP and increase or decrease in the
equilibrium price level. For each event,
assume that the economy is originally in a full-
employment equilibrium, mention if in the
new equilibrium there is a recessionary gap or
an inflationary gap.
A) Congress raises income taxes.
B) The Federal Reserve decreases the target
for the federal funds rate.
C) Migration to the US increases the working-
age population.
DJ Appreciation in the international value of
the dollar.
Q1. Consider the IS-LM model. Suppose the economy of Economica is initially at the general equilibrium. This year, Economica’s economy is hit by a negative oil price shock, i.e., oil prices in Economica increase dramatically.
a. Explain and show graphically how an oil price shock affects the labor, goods, or the asset market.
b. Explain and show graphically how an oil price shock affects the short-run equilibrium.
c. Explain and show graphically how an oil price shock affects the general (long-run) equilibrium.
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Similar questions
- The figure given below represents the equilibrium real GDP and price level in the aggregate demand and aggregate supply model Figure 8.3 U.S. Price Level B O AD, toAD; O AD, to AD₂ O AD₂ to AD₁ O AS, to AS; AS; to AS₂ 100 200 300 400 AS3 AS₁ AD₂ 500 Real GDP (billions of dollars) AD AS₂ AD3 In Figure 8.3, which of the following shifts would result in stagflation (economic stagnation and inflation)?arrow_forwardWhat kind of economic shock does the following statements represent? Short-term effects of rising household saving in response to RRSP and RRIFs tax-saving provisions: choose from: affect only long-run aggregate supply, positive aggregate demand shock, negative aggregate supply shock, negative aggregate demand shock, positive aggregate supply shock More Canadians vacation at home (Canada): choose from: negative aggregate supply shock, changes both short-run and long-run aggregate supply, positive aggregate supply shock, negative aggregate demand shock, changes long-run aggregate supply, positive aggregate demand shock Businesses face high commodity (input) prices: choose from: changes long-run aggregate supply, negative aggregate demand shock, positive aggregate demand shock, changes both short-run and long-run aggregate supply, negative aggregate supply shock, positive aggregate supply shockarrow_forward"The oil price run - up of 2007 - 08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects om overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007 - 08 should thus be added to this list of recessions to which oil prices appear to have made a material contribution". Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift.arrow_forward
- Graphically show the likely short-run impact on US real GDP and aggregate price level using the AD/AS model. Explain your prediction. Which curve in the AD/AS model would a change in US consumer consumption affect? Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forwardIS-MP and short-run output fluctuations: In the short-rum model, consider a domestic increase in demand for foreign goods. In particular, suppose that domestic residents experience a large increase in their taste for foreign-made products leading to an increase their demand for breign products. Using the standard IS/MP framework (recall, the MP curve is a horizontal line delineating where R lies across the IS curve), explain the macroeconomic comequences of the shock. If you were in charge of the Fed, how would you respond to stabilize short-run output?arrow_forwardConsider the aggregate supply-aggregate demand (AD-AS) model that we saw in class. Assume that prices are fixed in the short run and are fully flexible in the long run. The initial full-employment level of output is y-900 and the initial price level is p= 100: The aggregate demand curve is given by Y=1500 –6P: Scenario 2, short run: A major earthquake destroys a part of the economy's capital stock and reduces the full-employment level of output shifts to y = 880: In the short run, the output is and the price level is Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "%".arrow_forward
- Please write on the space provided what happens to each variable -- indicate whether each variable increases, decreases, or remains unchanged. Please show in the graphs the initial equilibrium, short run equilibrium, and final long run equilibrium. If possible, please provide only two graphs, one for IS-LM and one for AD-AS that show all of the equilibrium positions Suppose the economy is initially in a long-run equilibrium. Starting from this position, assume that an exogenous shock such as the Covid 19 pandemic pushes the economy away from the equilibrium. If the government chooses not to intervene in the economy, what will happen to the above variables in the long run? Please indicate in the space below what will happen in the transition from the short run back to the long run equilibrium and the final values of output and unemployment in the long run. Short-run Output __________________ Unemployment ___________________ Prices __________________…arrow_forwardPlease write on the space provided what happens to each variable -- indicate whether each variable increases, decreases, or remains unchanged. Please show in the graphs the initial equilibrium, short run equilibrium, and final long run equilibrium. If possible, please provide only two graphs, one for IS-LM and one for AD-AS that show all of the equilibrium positions Suppose the economy is initially in a long-run equilibrium. Starting from this position, assume that an exogenous shock such as the Covid 19 pandemic pushes the economy away from the equilibrium. Using the IS-LM and AD-AS framework, indicate what happens in the short run to output, unemployment, prices, interest rate, consumption, investments, and real money balances, as the economy moves from long-run equilibrium to short-run equilibrium. What economic condition is the economy in after the shock? __________________ Short-run Output ________________ Unemployment _________________ Prices…arrow_forwardThe graph below depicts an increase in aggregate demand due to an increase in net exports. This increase in aggregate demand is depicted as a shift from AD to AD₁. Price Level LRAS X AD Real GDP AS AD Tools AS, 0 a. In the long run, aggregate supply will adjust to move the economy back to the full-employment level of output. Show this shift using the graph above. Instructions: Use the tool provided "AS₁" to show the movement back to full-employment output. Plot only the endpoints of the line, keeping AS, parallel to AS with the appropriate Intersection (2 points total). b. How does the new long-run equilibrium compare to the Initial full-employment level before the Increase in net exports? O The price level is higher, but output is lower. O The price level is lower, but output remains the same. O The price level is lower, but output is higher. O The price level is higher, but output remains the same.arrow_forward
- Depict in the AD-AS model, an economy exhibiting a short run equilibrium with a negative output gap resulting from a decline in AD caused by falling investment spending. What is true about the level of unemployment in this circumstance? What is true about the utilization of capital in this circumstance? What are the implications of your statements in parts a and b for long run adjustments in resource prices? How will these changes in resource prices impact the economy in the long run? Depict this change in your graph.arrow_forward1. Consider the following simple Keynesian model, (i) Rewrite the model into matrix form with Y, C and I as endogenous variables and Go and i as exogenous variables. (The coefficient matrix must be a 3 by 3 matrix.) Y=C+I+Go C = 200+ 0.8Y I= 1000-2000 (ii) Compute the equilibria Y*, C* and I* as functions of Go and i using Cramer's rule. 8Y* (iii) Find and di ƏY* ƏGo (iv) Give an economic interpretation of national income? ƏY* " ƏGo what should the government do if it wants to raisearrow_forwardDiscuss in detail the limitations of the IS-LM model. Why is it unrealistic for todays economiesarrow_forward
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